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U.S. manufacturing sector activity continues to expand, although the pace of expansion may be slowing, according to the Manufacturers Alliance/MAPI Survey on the Business Outlook – December 2010. The December 2010 composite index – a leading indicator for the manufacturing sector – fell slightly to 75 percent from 77 percent in the September 2010 report. This is the fifth consecutive quarter the index has been above the 50 percent threshold, the dividing line that separates contraction and expansion.
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The current index is a dramatic improvement from the record low 21 percent recorded in the March 2009 survey, signaling that an impressive turnaround for industry continues.
“The trends in the composite index and in the individual indexes are remarkable in that most were little changed from their September levels as they continue to remain at relatively high levels,” said Donald A. Norman, Ph.D., MAPI economist and survey coordinator. “The takeaway from this quarter’s survey is ‘steady as she goes,’ although the rise in the inventory index suggests that the pace of the expansion has slowed.”
The business outlook index is a weighted sum of U.S. shipments, backlogs, inventories, and profit margin indexes. In addition to the composite index, the survey includes 12 individual indexes. Most individual indexes changed very little between September and December.
The capacity utilization index, based on the percentage of firms operating above 85 percent of capacity, improved to 33.3 percent in the current survey from 28.1 percent in September. In addition to continuing its upward trend since reaching a record low of 7 percent in December 2009, the index is now above the long-term average utilization rate of 32 percent.
The non-U.S. prospective shipments index, which measures expectations for shipments abroad by foreign affiliates of U.S. firms in the first quarter of 2011 compared to the same quarter of 2010, improved to 89 percent from 84 percent. The annual orders index, based on a comparison of expected orders for all of 2011 with orders in 2010, increased to 90 percent in the December survey from 86 percent in September.
The research and development index, regarding expected R&D spending in 2011, was 73 percent in December, slightly above the 70 percent in the September 2009 report.
The backlog orders index advanced to 83 percent in December from 81 percent in September. The non-U.S. investment index, based on expectations regarding capital expenditures abroad in 2011, was solid at 75 percent in December compared to an already strong 73 percent in September.
The U.S. investment index is based on expectations of executives regarding domestic capital investment for 2011 compared to 2010. The index was 81 percent, a slight advance from 80 percent in the previous survey. The inventory index increased to 69 percent in December from 63 percent in September, an indication that the growth of manufacturing sales is slowing.
The quarterly orders index, based on a comparison of expected orders in the fourth quarter of 2010 with those in the same quarter one year ago, decreased to 87 percent in December from 89 percent in September. The U.S. prospective shipments index, which reflects expectations for first quarter 2011 shipments compared with the first quarter of 2010, declined to 88 percent in the December survey from 90 percent in the September report.
The profit margin index fell to 85 percent in December from a record high of 87 percent in September. The export orders index, which compares exports in the fourth quarter of 2010 with the same quarter in 2009, was 80 percent in December, down marginally from 82 percent in September.
In a supplemental component of the survey, respondents were asked for their outlook regarding the value of the U.S. dollar over the next year and the impact on their companies if it were to drop by 10 percent from its current value.
Sixty percent of respondents reported their companies’ exports would be helped to some extent if the dollar were to fall by 10 percent and 60 percent indicated that profits would rise by some degree. A large majority, 92 percent, said that a fall in the value of the dollar would have little effect on investment spending, and all survey participants said it would have no effect on manufacturing location decisions.
The survey reflects the views on current and future business conditions of 62 senior financial executives representing a broad range of manufacturing industries.